What Is Monero (XMR) Cryptocurrency and How Does It Work?

Ten years ago cryptocurrencies such as Bitcoin and Ethereum had next to no monetary value, and little use as anything other than digital collectibles. In 2010 Bitcoin, which has reached highs of over $20,000, traded for less than $0.003 per token. Infamously, the first ever transaction conducted in Bitcoin took place when a pair of enthusiasts traded 10,000 bitcoins (today worth over $100 million) for two large Papa John's (PZZA - Get Report) pizzas.

Fast forward to today. Developers and entrepreneurs have created hundreds of cryptocurrency projects using blockchain, the technology format behind Bitcoin. Their market is worth hundreds of billions of dollars even after several downturns, indicating that this isn't just a short-term bubble. There's something stable here (even if that "something" isn't quite worth $22,000 per Bitcoin token).

New projects enter this marketplace constantly, each hoping to find a new angle on blockchain's ability to create unique digital assets. In 2014 one of those entrants was Monero. Here's why.

What Is Monero?

Let's back up a second. To understand what Monero is, first we need to understand cryptocurrency. So:

What Is Cryptocurrency?

Cryptocurrency is digital, private/decentralized money. And to understand cryptocurrency projects like Bitcoin and Monero you must understand both aspects of that description.

Digital Money

Digital money is currency that only exists online. It was never printed, doesn't have a note anywhere and takes no other physical format. It exists only as an entry in a database.

This is… actually nothing all that new. Most American consumers spend their lives exchanging money that is almost entirely digital because the U.S. dollar is 91% a digital currency itself. At time of writing the U.S. economy had approximately $18.5 million in cash and cash-equivalent value in circulation and approximately $1.7 trillion in actual, physical printed bills.

Most money in the 21st century exists only in a computer. In practice it will never be anything but numbers in an account, even if in theory you could pull any of it out in physical bills at any one time.

What makes cryptocurrency different is that it is only digital. It is entirely a creation of blockchain, a coding format which lets programmers create unique digital assets that (for the first time ever) people can't copy endlessly.

Private/Decentralized

If most currency is digital in practice, if not in theory, decentralization is what truly separates government-issued currency from cryptocurrency.

Cryptocurrency is issued by private organizations. Often, such as with projects like Bitcoin, it is completely decentralized, meaning that there is no central owner of the money. No one chooses to release more or less at any given time, no one controls where it goes.

When a currency is not decentralized it functions much more like a government-backed currency. An organization can decide to issue new currency or to withdraw currency from circulation at any given time.

Until now, centralized gatekeepers have been essential to making virtual currency work. If a bank account has $1,000 in it, there's technologically nothing to stop someone from making himself a millionaire just by entering a few more zeros on that account. Every payment and credit system in the world would treat this individual as though he had $10 million to his name. Central oversight is what prevents that from happening, between federal laws, the FBI, the IRS and the banking system. (Nor is this new. Even before computers, only oversight kept someone from entering those extra zeroes in a bank ledger with ink and paper.)

This is necessary because someone who could duplicate money endlessly would render it worthless. Cryptocurrency, through a combination of cryptography and the format of blockchain databases, allows computers to exercise this control organically, solving the problem of duplication without the need for central authority.

That is cryptocurrency. It is money that exists only online, built on the blockchain coding format and either privately organized or (more often) completely decentralized.

Back To: What Is Monero?

So, Monero is a cryptocurrency that launched in 2014. Like Bitcoin it is entirely a digital form of money. That means that it is not part of a larger project to do or create some service, unlike many blockchain tokens.

Monero is a privacy-oriented cryptocurrency. Any given Monero token does not publicly show who owns it, who spends it or who receives it. Even the amount of any given transaction is kept hidden from the public… and by public we also mean the Monero project founders themselves. This information is kept locked inside the blockchain database. Unless you have the key to open any given entry, all you can see is garbled code.

Wait, I Thought Bitcoin Was the Private Currency

We all did.

Contrary to its reputation (and widespread adoption by pirates, scammers and thieves), Bitcoin is not and has never been private. Blockchain uses what's called a "public ledger" for its databases. This means that everyone can see what happens inside each block of data. This is key to the format's security, but it also means that the default setting for privacy is nil.

With Bitcoin, anyone can see a record of every account that has owned, sent and received each individual bitcoin for that entire token's existence. Now, users can falsify their account information to hide their identities, but the account itself is a public record.

This is how Monero seeks to set itself apart. It disguises each record of transactions and ownership, relying most notably on a process called the "ring signature." This signature is a key that the blockchain database generates during a transaction. When a user receives a ring signature, it is essentially a way of saying that the transaction has been verified as legitimate by the database without revealing the user who verified it.

Monero generates ring signatures for one-time use. As a result, even if someone could look up the signature that authorized a transaction, all they would get is worthless data.

How Much Is Monero Worth?

A lot.

The privacy-focused approach to cryptocurrency has worked. Since its launch, Monero has climbed the ranks and, at time of writing, was the 11th most valuable cryptocurrency in the world. It was selling for $92 per token, with all tokens in circulation coming to more than $1.5 billion in total value.

Problems With Monero

As perhaps you could guess, Monero's success has come with some problems.

While at time of writing Bitcoin was still the currency of choice for criminals, Monero has increasingly gained acceptance among this community. Outlets such as Reuters have noted the "growing trend for criminals to seek alternatives to bitcoin," particularly as law enforcement grows increasingly sophisticated about tracking the currency's publicly logged transactions. This has led to an increasing number of illegal online markets and hackers accepting Monero as payment.

It has also led to a practice known as "cryptojacking."

Creating new Monero tokens, a process known as "mining," takes far less computing power than creating new tokens for Bitcoin. The latter has actually become infamous for its exorbitant drain on computers and electricity; according to one estimate Bitcoin consumes as much power as the nation of Ireland.

Monero seeks to remedy that through a simplified process that allows individual computers to mine more efficiently for new tokens. However, this has also made it easier for hackers to install illegal mining malware on the laptops and PCs of unsuspecting users. It is a problem that is not unique to the Monero project, even if it has gotten a higher profile due to Monero's success.

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